Paul L. Caron

Wednesday, July 17, 2019

Faulhaber: Other Nations Will Follow France With Their Own Digital Tax

New York Times op-ed:  Beware. Other Nations Will Follow France With Their Own Digital Tax., by Lilian V. Faulhaber (Georgetown):

The international tax system is behind the times. But we need coordinated reform.

Last Thursday, the French Senate passed a digital services tax, which would impose an entirely new tax on large multinationals that provide digital services to consumers or users in France.

Digital services include everything from providing a platform for selling goods and services online to targeting advertising based on user data, and the tax applies to gross revenue from such services. French politicians and media outlets have referred to this as a “GAFA tax,” meaning that it is designed to apply primarily to companies such as Google, Apple, Facebook and Amazon — in other words, multinational tech companies based in the United States.

The digital services tax awaits the signature of President Emmanuel Macron, who has expressed support for the measure, and it could go into effect within the next few weeks. But it has already caused significant controversy, with the United States trade representative opening an investigation into whether the tax discriminates against American companies, which in turn could lead to trade sanctions against France.

The French tax is not just a unilateral move by one country in need of revenue. It is part of a much larger trend, with countries over the past few years proposing or putting in place a veritable alphabet soup of new international tax provisions. They have included Britain’s DPT (diverted profits tax), Australia’s MAAL (multinational anti-avoidance law), and India’s SEP (significant economic presence) test, to name but a few. At the same time, the European Union, Spain, Britain and several other countries have all seriously contemplated digital services taxes like the one just passed by France.

These unilateral developments differ in their specifics, but they all seek to tax multinationals on revenue that countries believe they should have a right to tax, even if international tax rules do not grant them that right. In other words, they all reflect a view that the international tax system has failed to keep up with changes in the economy.

The general outlines of that system originated in the early 20th century, and all of these recent proposals and provisions suggest that it needs to be updated for a world in which companies can make significant amounts of income without ever being physically present in a country or selling any tangible goods. ...

France’s planned tax is a clear warning: Unless a broad consensus can be reached on reforming the international tax system, other nations are likely to follow suit, and American companies will face a cascade of different taxes from dozens of nations that will prove onerous and costly.

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